Household Debt and Business Cycles Worldwide: Online Appendix
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Household Debt and Business Cycles Worldwide: Online Appendix Atif Mian, Amir Sufi, and Emil Verner Data Appendix Household debt and non-financial firm debt. Household and non-financial firm debt are from the BIS's \Long series on credit to the private non-financial sector" database. See text for details on the private debt to GDP variables. National accounts. National accounts data are from the World Bank's World Development Indicators (WDI) database. We use annual data in current and constant prices from the WDI on GDP, Y , household consumption, C, gross capital formation, I, and government consumption, G. We supplement WDI data on total household consumption with data on household consumption expenditure on durable goods, Cdur, and non-durable goods, Cnondur, from the OECD and national statistical offices.1 We also collect data on investment by type of good from the OECD. Exports, imports, and the current account. Data on exports, X, and imports, M, in current prices are from the OECD or International Monetary Fund's International Financial Statistics (IFS) database, depending on data availability. Net exports is the difference between exports and imports, NX = X − M. Current account series, CA, are from the OECD or IFS. Disaggregated exports and imports. In addition to overall exports and imports, we construct variables for consumption and non-consumption (capital and intermediate) trade using disaggre- gated trade data from the NBER-UN World Trade database (from 1962-2000) and UN Comtrade (from 2000-2012). We aggregate four digit SITC revision 2 trade flows into consumption, capi- tal, and intermediate imports and exports following the Basic Economic Categories classification scheme from UN Comtrade. With consumption exports and imports, XC and MC, we construct the share of consumption in total exports and imports, sXC and sMC . Unemployment rate. Data on national unemployment rates, u, are from the OECD harmonized unemployment rate database, where possible. For countries where the OECD harmonized unem- ployment rate is series is short or missing, we use unemployment rate data from the IFS, other OECD series, or national central banks. The harmonized unemployment rate is measured by apply- ing the same definition of unemployment across OECD member countries to obtain estimates that are more internationally comparable. However, since we focus on changes in the unemployment rate, level differences in definitions that are constant over time will not bias the results. 1These series are available for 23 of the 30 countries in the sample. Information on durable and non-durable consump- tion is missing for Hong Kong, Indonesia, Singapore, Switzerland, Thailand, Thailand, and Turkey. The OECD decomposes final consumption expenditure of \households on the territory" into non-durable, semi-durable, durable, and services consumption. 1 Sovereign and credit spreads. The sovereign spread, spr, is constructed as the difference between the 10-year government bond yield and the 10-year U.S. Treasury yield. Government 10-year bonds yields are from Global Financial Data (code \IG-ISO-10"). The real sovereign spread is the nominal spread minus the difference in CPI inflation rates. MS The mortgage-sovereign spread, sprt , is the difference between the mortgage lending rate and the 10-year government bond yield. The mortgage lending rate is from Global Financial Data (code \IL-ISO-M"). For Denmark we use the yield on 10 year mortgage bonds instead of the mortgage lending rate (\INDNK10D"), and for Sweden we use the yield on 5 year mortgage bonds from GFD (\INSWE5D"). For Japan we use the interest rate on building society mortgages from Datastream, and for Korea we use the 5 year mortgage bond yield from the Bank of Korea via Datastream. The sample includes a mortgage-sovereign spread for 26 countries out of 30 countries.2 The mortgage lending rate refers to the rate on fixed or variable rate loans for home purchase, depending on the prevalent contract in each country. Maturity typically ranges from 5 to 30 years. corp Corporate credit spreads, sprt , are constructed as the difference between the corporate bond yield and the 10-year government bond yield. For 15 countries the corporate bond yield series are from Global Financial Data (code \IN-ISO").3 For 6 other countries we obtained series on the corporate lending rate from Global Financial Data (code \IL-ISO").4 For the United States the corporate credit spread is the Baa-Aaa spread (average of Q4 monthly values). All interest rate series are aggregated to annual series by taking quarterly averages of daily, weekly, or monthly rates and using the fourth quarter value. For eurozone countries, we use the Germany 10-year government bond yield as the benchmark rate.5 Professional GDP growth forecasts and forecast errors. We use GDP growth forecasts and forecast errors from the IMF World Economic Outlook (WEO) Historical Forecasts Database and from print editions of the OECD Economic Outlook. Forecasts from the OECD Economic Outlook are hand-collected. Forecast errors are defined as the difference between realized and forecasted growth. To construct forecast errors we use realized GDP growth for year t reported in year t + 2. This allows us to compare forecasts with realized growth rates based on proximate vintages of data.6 The WEO Historical Database reports forecasts for growth up to the five year horizon since 1990. We supplement this information with IMF one-year ahead forecasts for the G7 countries from 1972 onward. One-year and two-year ahead forecasts from the OECD Economic Outlook are available since 1973 and 1987, respectively. Government debt to GDP. The government debt to GDP ratio, GD=Y , is from the IMF's Historical Public Debt Database (Abbas et al. (2010)). To construct changes in government debt 2The mortgage sovereign spread is missing for Hong Kong, Indonesia, Thailand, and Turkey. 3The 15 countries are Australia, Austria, Belgium, Canada, Denmark, Germany, Italy, Japan, Korea, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. 4These countries are Finland, France, Greece, Ireland, Poland, and Portugal. 5Specifically, we use the German 10-year government bond yield for Austria, Belgium, Finland, France, Germany, Ireland, Italy, Netherlands, Portugal, and Spain starting in 1999 and for Greece starting in 2001. 6All results based on forecast errors are robust to using realized GDP growth from the WDI instead of the WEO Historical Database or the OECD Economic Outlook. 2 to GDP, we do not take differences across breaks in the series. Real house prices. Real house prices, HPI, are constructed from the BIS's \Long series on nominal residential property prices." These series cover 20 countries in our sample and start in 1970 or 1971.7 Annual growth in real house prices are constructed from changes in fourth quarter values, deflated by the CPI. Real effective exchange rates. Real effective exchange rates, REER, are from the BIS's “Effec- tive exchange rate indices" database. We use the narrow indices, which extend back to 1964 for 24 countries in our sample.8 An increase in the index indicates an appreciation. Exchange rate regime. Information on the de facto exchange rate regime is from Reinhart and Rogoff (2004), updated to 2010 in Ilzetzki et al. (2010). We define \Fixed regimes" as arrangements with a coarse classification code equal to 1 (currency boards, a pre-announced horizontal band that is narrower than or equal to ±2%, or a de facto peg). \Intermediate regimes" are defined as arrangements with a classification code of 2 or 3 (crawling pegs, crawling bands, managed floating, moving bands, etc.). 7The countries without house price series from the BIS are Austria, Czech Republic, Greece, Hungary, Indonesia, Mexico, Poland, Portugal, Singapore, and Turkey. 8Countries without REER series are Czech Republic, Hungary, Indonesia, Poland, Thailand, and Turkey. 3 Simple Model of Permanent Income Shocks and Credit Demand In this section we summarize a simple model where household debt expands today in anticipation of higher income tomorrow. Consider a small open economy with exogenously given output and t+j a continuum of infinitely lived households. Output yt follows a stochastic process with t = Et∆yt+j representing the expected change in income j periods forward at time t. Unanticipated changes in income can be driven by shocks such as technology shocks, natural resource discovery, or terms of trade shocks. Households face no borrowing constraints and maximize, 1 X t E0 β u(ct): t=0 There is a risk-free one period bond that can be traded internationally with each household facing a sequential budget constraint, ct + (1 + r)dt−1 = yt + dt; (1) and a no-Ponzi game constraint, dt+j lim Et = 0: (2) j!1 (1 + r)j 0 0 The Euler equation of this problem can be written as u (ct) = β(1 + r)Etu (ct+1): Assuming 1 2 β(1 + r) = 1 and quadratic utility with U(c) = − 2 (c − c) with c ≤ c, makes marginal utility linear and hence consumption a random walk with ct = Etct+1. Iterating forward (1) and using (2) p and ct = Etct+1, we get that consumption equals expected permanent income Etyt minus interest payments on outstanding debt rdt−1 in equilibrium, 1 r X yt+j c = E yp − rd = E − rd : (3) t t t t−1 (1 + r) t (1 + r)j t−1 j=0 p Plugging ct = Etyt − rdt−1 into equation (1), we can write down the change in debt at time t in terms of the present value of expected changes in future income: 1 t+j X ∆d = t : (4) t (1 + r)j j=1 Productivity shocks thus generate a positive relation between the change in debt and subsequent output growth. Growth in debt is driven by higher demand for credit in response to expected future income growth and a desire to smooth consumption.